For China, Stimulus Seems to Be the Hardest Word

(Reuters) - The managers of Chongqing Changan Automobile could be forgiven for wishing it was 2008 again.

China's No.4 car maker was one of the obscure winners of Beijing's decision to release a flood of cash into its economy during the darkest moment of the global financial crisis.

But when the stimulus stopped, particularly incentives for car buyers earlier this year, so did the company's runaway growth.

After car sales growth of 46 percent in 2009 and 32 percent in 2010, the maker of the squat Ben Ben mini car and Changan Star van saw a modest 3 percent rise in the first 10 months of 2011. It also watched its share price plunge.

If Changan (000625.SZ) is hoping for a repeat of the 4 trillion yuan ($628 billion) that China spent on roads and rails and other projects, it may be in for a long wait.

China's leaders understand that safeguarding growth is very important, but in 2008 the government had more policy tools they could use, said Liang Youcai, a senior economist at the State Information Centre, a top government think-tank in Beijing.

They won't unveil a large-scale economic stimulus anywhere close to the 4 trillion yuan program.

Beijing has reasons to steer clear of big stimulus, including the need to avoid firing up inflation, which remains relatively high.

A local government debt crisis is an awkward side effect of the government incentives in 2008, making stimulus a loaded word.

And a looming 2012 political transition that will see top leaders step down, leaves policymakers aiming for stability, not a big fiscal injection of cash into the economy.

Furthermore, China may have the fiscal leeway to do enough for the economy anyway, with the fine tuning that Premier Wen Jiabao has said will keep its economic engine running smoothly, analysts say.

FISCAL FIREPOWER

Still, pressure is building.

With Europe's debt-laden economy sinking deeper and the U.S. growth outlook well below trend, China's export sector -- still the biggest engine of job growth for the country of 1.3 billion -- could be hit hard.

Economists at UBS say a euro zone recession causing a fall in imports only half as deep as that in 2008/09 could wipe around 1.7 percentage points off Chinese GDP in 2012.

That could help explain recent dire rhetoric from some of China's leaders, like Vice Premier Wang Qishan, who warned last month that the latest leg of the global financial crisis would lead the world towards an unavoidable chronic downturn.

In fact, things may not be so bad. China has plenty of slack in the system to boost its domestic economy without embarking on major monetary or specific fiscal stimulus programs, argue analysts.

The central government has long planned to boost spending in the final months of this year -- China had a 1.3 trillion yuan surplus in the first 10 months, against a plan to end the year with a budget deficit of 900 billion yuan, a target analysts expect Beijing to come close to.

Some of that spending could be diverted to sectors likely to suffer as European and American consumers buy less.

With its strong fiscal position, Beijing can and should allow fiscal measures to play a larger role in supporting small companies and export-oriented companies in the coming quarters, Qu Hongbin, HSBC's chief China economist wrote in a recent note to clients.

This should counterbalance weaker export demand and help China achieve a soft landing.

A reasonably tight labor market also argues against the need for substantial stimulus according to Nomura's chief China economist, Zhang Zhiwei, who calculates that the ratio of job openings to job seekers remains above one. It was consistently below one during 2008.

Creating jobs is key for the stability obsessed Communist Party, which has staked its legitimacy on fast and steady economic growth.

ROOM TO REBALANCE

In a way, the 2008 downturn hit the global economy at a good time for China. Policymakers had been coping with a deflationary environment after a period of comparative austerity and were ready to press the button on a big spending program.

They had been putting projects on the shelf that they would have liked to do a few years back, so that when the crisis hit they had blueprints ready to roll, said Ardo Hansson, lead economist for the World Bank in China. I think this time they would be scrambling to find projects.

Policymakers also are constrained by inflation, which came off its high of 6.5 percent during the summer. But at 5.5 percent, it remains too high for comfort in a country where rising prices have a history of spurring social unrest. A big injection of cash could easily reignite sharp price rises.

Then there is the 1.7 trillion yuan debt burden of China's local governments, a headache Beijing has only just begun to address.

If anything, the leadership is likely to use a soft patch in 2012 to push ahead with structural reforms in areas like price controls to ease inflation risks in the longer term.

China's latest five-year plan set a conservative GDP growth target of 7 percent, widely regarded as giving the government political leeway to rebalance the economy without having to simultaneously maintain breakneck economic expansion.

So whether by design or by default, major stimulus seems decidedly unlikely this time around.

Of course that may not do much good for China's automakers, with the industry facing an uphill struggle next year.

I am not optimistic about Q4, and Q1 next year could be similar, Changan's president, Zhang Baolin, told Reuters late last month. China's car market next year is likely to remain in a slow growing trend overall.